Financial Markets For The Rest Of Us|
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
many stocks with P/E ratios of 5 or lower that are exceptions to the rule. More and more investors have driven the stock prices (and thus the P/E ratios) higher in hopes of much better returns in the future. This is especially true in popular industries such as the high-tech. In many of these cases, the idea of valuing stocks using the P/E ratio is cast aside while the buying frenzy continues. Today many may regard a stock with even a P/E ratio of 10 as a laggard. Conservative investors have always been guided by the P/E ratio, although you would be hard pressed to find many who would stick to the "P/E ratio of 5" rule. Some others believe that in today's market the P/E ratio is no longer applicable in valuing all kinds of stocks. They may use other ratios such as the PEG ratio (covered next). Note that companies with zero or negative earnings do not have a meaningful P/E ratio at all. Investors must use other tools to value their stocks. Here are some examples of the varying P/E ratios in early 2000: Ford: 9, GE: 47, Microsoft: 64, Yahoo: 1,700, Amazon.com: N/A (negative earnings).
Calculating the P/E ratio is very easy. Let's calculate the P/E ratio of Intel. Again, in early 2000 there were 3.3 billion shares of Intel out there. Let's assume the current price of Intel stock to be $60 per share. The company had earnings of about $7 billion dollars in 1999.
EPS (Earnings Per Share) = $7 billion / 3.3 billion shares = $2.12 per share.
P/E Ratio = $60 / $2.12 = 28.3.
That's all there is to it. Of course you don't have to calculate this ratio yourself anymore. Just look up a company's profile (for example, on the Web) and you will have this and other ratios at your fingertips.
PEG Ratio - This is short for Price-to-Earnings-to-Growth. As if P/E ration didn't have enough divisions in its calculation, the PEG ratio …
Table of Contents